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The depressive Super Cycle

We are now firmly in a downward trend that may last for two decades.

If you believe that history repeats itself then you may feel vindicated by analysing The Economist’s All Commodity Price Index for the last 130 years.

The trend is depressing and if history is to repeat itself and the world follows the last four cycles since 1887, commodity prices are very likely to remain suppressed for another 15 years or so.

The cycle currently shows that the world has entered the fastest slowdown in commodity prices since 1931 on a four-year basis, and we are on track for the fastest five-year decline since then too.

The result will be a massive realignment of the world economy. Power now goes back to the consumption-based economies as advanced economies will be big beneficiaries. In contrast, commodity and oil producers in Latin America; Africa and the Middle East (and Russia) will find economic growth quite challenging.

A short history of the commodity Super Cycle

As is clear from the graph below, there are four clear peaks in the commodity cycle and they are about 30 years apart. This shows that the commodity cycles last for around three decades each.

Each cycle has a surging decade, which is followed by a massive collapse of around five years and then a slower downward decline, which lasts another 15 years.

The peak years were 1917, 1951, 1980 and 2011. The troughs were 1931, 1971 and 2002. If history repeats itself, the next trough, or turning point, should be around 2030.

The first peak in 1917 has more to do with the demand for iron and food during war and the end of the first wave of globalisation. The supply of some food stuff was very limited and during the First World War the extraction of minerals was in some cases interrupted. From 1903 to 1917 the index rose 40% in real terms. (This was before central banking so prices rose much slower than in the subsequent three cycles.)

The Second World War did result in a rise in prices of around 66% in real terms, but it was the vast rebuilding after the war that ignited the rise of commodity prices. The rebuilding of the US economy led to a growth burst in the late 1940s and early 1950s. This resulted in a rise of 155% in real terms between 1938 and 1951.

This was the longest and strongest rise as Keynesian economics came into play and the war demand for iron ore and oil (which ironically was never part of the commodity index), as well as the difficulty of getting food to markets.

Apart from the supply and demand challenges, the world started to abandon the gold standard.

The subsequent downward cycle bottomed out in 1971. It was halted by the growing global trade and the oil crisis. This led to gold rising for the first time in a decade and peaking in 1980. Oil too peaked at a price far higher in 1981 than it is currently! From 1971 to 1980 real prices rose 145%.

The most recent peak was reached in 2011, 31 years later, and followed a decade of massive growth. This was mostly due to the rise of the Chinese and other developing countries’ economies, and creating a unprecedented demand for commodities. From 2001 to 2011 real price in dollars rose by 140%. It was quickly named the “Super Cycle”.

Commodity Super Cycle chart; The Economist All Commodity Index (In real terms)

Screen Shot 2016-01-12 at 5.15.58 PM

Basic source: The Economist – calculations Mike Schussler. See notes below.

It is therefore clear that a typical upward phase of a super cycle is between nine and 12 years. Despite this, many people do not anticipate an end to such a cycle. Nobody thought the growth brought by the rebuilding after the Second World War would end. Ditto for the rise of Japan and the rising Asian Tigers after that and more recently that the Chinese economy would recede into the faltering state it currently finds itself in.

The bad news from history is that history is repeating itself and that we are now firmly in a downward trend that may last for two decades. Ironically, in each of the cycles described above, the growth faltered at the point when the there was a major increase in the supply of new commodities.

History also shows that the average decline in price from peak to trough is around 56% in real terms. The index has declined by only 38% during the past four years, but the real problematic part is that nominal prices fell at the fastest rate for any four year period since 1931. (See chart.)

This means that the world can expect further declines in commodity prices over the next decade, but probably at a slower pace.

Moving four year change in annual commodity prices

Screen Shot 2016-01-12 at 5.16.08 PM

Basic source: The Economist – calculations Mike Schussler

A note on the data used and methods:

For over 150 years The Economist newspaper has published commodity price indices that measure the value of commodities the world uses.

The commodity index is not perfect but it is the longest running global commodity index and is currently made up of the 25 most traded commodities other than gold and oil which are monitored separately on the same page.

The weekly numbers for each year since 1887 are averaged for each year giving an annual view of the world commodity prices and by implication the overall demand and supply picture over many decades in the traded commodity market.

Taking away the effect of implied American inflation as the commodity index is priced in dollars gives one a very good understand of the real commodity cycle.

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Don’t these so called economists have such perfect hindsight?
Some pack of fag packet calculations on past cycles to pretend to make some meaningful bearing on the future.
What utter nonsense!

Tell that to the value managers who bought mining companies that since lost 80% of it’s value. On what does one base any investment decision? Always on some system that somehow worked in the past.

Even you personally – you believe the ATM at your bank will spew out money when you swipe your card, that your spouse will have dinner ready, your domestic will pitch for work and your pension fund will pay out because it did so in the past.

What else do you want to base decisions about the future on?

Ask Mike in 15 years and he’ll tell exactly what you should have done by showing you a historical chart.

What is noteworthy is that the peaks on the “Moving four year change in annual commodity prices” correspond with periods of expansionist monetary policy.

1917, One can blame this on WW1 but 1913 heralded the introduction of the US Federal reserve. One does not see such a big peak in WW2 (1939 to 1945). In 1914 Wilson decided that the Fed was to be put to use financing the war effort of the “Entente”. This both violated the the Neutrality Act as well as the F.R. Act of 1913. It was against the law for the Fed to receive Treasury Paper as an asset for monetising debt. Treasury paper was NOT on the list of eligible assets. Only in 1935 was this illegal act retrospectively legalised by the FR amendment act. Since there were no repercussions we can assume the Fed is above the law. Since then they have monetised debt by purchasing treasury paper illegally as well as having illegally sold (stolen?) a great deal of gold of which they were custodians. As the Germans.

1951. What is interesting is that the US Fed was able to massively expand the money supply yet at the same time pay down debt. This led to the post WW2 boom with stable interest rates and stable prices. Halcyon days for the US and Detroit was a nice place to live. The secret was the gold standard. Gold was the ultimate extinguisher of debt as it was the only form of money that was nobody’s debt.

1980. When the US fraudulently reneged on their promise to pay one ounce of gold for 35US$ it opened a Pandora’s box of a sort. It was fraudulent as the US did have the gold to honour their commitments. Gold is the policeman in the monetary system. Gold does not regulate prices it regulates interest rates. If one exiles gold only trouble will follow as it has ever since. Keynesian fraudsters advised the US government to follow an expansionist policy and massively expanded the money supply. Inflation and interest rates rocketed. When Volcker took over the Fed 30 year treasuries’ interest rates were north of 15%. Since then there has been an ongoing reduction of interest rates and concomitant destruction of US industrial capital and de-industrialization of the US.

When the dot.com bubble burst the US Fed embarked on an expansionist policy. Falling interest rates has wreaked havoc and the cure was more of the poison. Ongoing Fed bond purchases drove interest rates to zero and the bond bubble inflated while capital erosion continued unabated. Is it a coincidence that the most companies went bankrupt when interest rates were at historical lows? Inflation was muted. The Fed desperately wanted inflation but none was forthcoming. All the newly created dollars went back into the bond market where profits were risk free -with a spillover into commodities. Now the debt monster has asserted itself and is sucking the life out of the global economy. Think of a wage earner and how much they have to save to get a certain retirement income. Now halve returns and they have to save double this.

Loose money finds a home- as it does. Big trouble coming your way soon. The debt monster is rearing its ugly head. The debt is irredeemable as the money to pay it does not exist.

If it was that easy to predict the future Mike then why are you working still? Sorry to be a bit blunt but …..

If the above hypothesis has validity it would also mean we are in for a Global war very shortly or has this in fact started?

not entirely the real kick off is when Trump enters the white house

Mike, maybe you should ask these'” never-beens” what they do for a living….sounds like mining managers, money managers, and yes bean counters!

Richard the Great doesn’t really refer to the US trade deficits and their role in the Fed’s monetary policies at all….maybe he wants to add some to complete his M3 argument!

If you walk past your greengrocer and he sells water melons for R100 each, you don;t buy it…why not ? because the moving average chart in your brain tells you that they are overpriced!

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